Pulitzer Prize for National Reporting: The Wall Street Money Machine

Nomination letter by Paul Steiger

Ever since the great economic meltdown tossed millions out of work three years ago, ordinary citizens and experts alike have sought an explanation for the crash’s central conundrum: What made the financial crisis so severe? To what extent did questionable business done on Wall Street contribute to the size of the bubble and thus the resulting magnitude of the collapse? And who were the people at the heart of those questionable deals?

ProPublica reporters Jesse Eisinger and Jake Bernstein set out to answer those questions. Their work, entered here, illuminates areas of arcane finance that are crucial to the future health of our nation. The series lays out with devastating clarity the actions Wall Street bankers took that prolonged and exacerbated the crisis. Briefly put: Some bankers on Wall Street recognized problems emerging in the housing market long before the public and policy makers did. Buyers for mortgage-backed securities were retreating. But bankers found clever ways to keep their assembly line going despite the lack of demand and thereby delayed and deepened the ultimate crash. The result was huge gains for the bankers, and a major loss of jobs and savings for the public. The Columbia Journalism Review called our coverage “the most important business series” of the year.

We think it is even more important than that, a critical contribution to Americans’ understanding of our most devastating national crisis in years. We published the series on ProPublica’s web site, and it was picked up and expanded on by numerous bloggers and writers for traditional media. We used stories, charts and even a comic book treatment to make the topic accessible to a general audience.

Not part of this entry, but also helping to bring this crucial work to a much greater audience, was an unusual and imaginative collaboration with radio, specifically NPR’s Planet Money and Chicago Public Radio’s This American Life. From the beginning, they were closely involved with Jesse and Jake’s work, with the goal of turning it into powerful radio. They certainly did that, producing a brilliant 40-minute program and subsequent podcast that made good use of interviews with our reporters. In addition, a satirical, Broadway-style ditty that they commissioned helped give our story and their broadcast a second life, generating links and attention from the New York Times’ Frank Rich, among others. More reach came from a painfully hilarious, avant-garde, “auto-tune the news” presentation.

The result was that Jesse and Jake’s work reached an audience that at the time was the largest ever to view one of our projects. Reader response let us know that our series helped change the way people saw the financial crisis, equipping them with knowledge that is essential if we are to avoid a repeat.

Our first story, published in April, detailed how in the run-up to the crisis the hedge fund Magnetar—with the help of major banks—drove the creation of $40 billion worth of complex securities and bet against many of them as part of a strategy to profit from the housing market decline. Magnetar made hundreds of millions of dollars by helping to create products that it appears were built to fail.

Reporters Eisinger and Bernstein faced many obstacles reporting the story. There were few publicly available documents to show the way. Hedge funds are often secretive about their investing strategies. Each of the deals, a collateralized debt obligation, or CDO, was a private transaction, its innards hidden to all but direct investors. As we learned, sometimes even the investors didn’t know the full story of their investment.

Jesse and Jake combed through thousands of pages of difficult-to-obtain private financial documents. The two spent months canvassing hundreds of people to find the handful with firsthand knowledge and a willingness to discuss it. One former banker, when shown details of a CDO he had helped Magnetar build, shook his head and declared, “I deserved to be fired for this.”

The story had immediate impact. When the Securities and Exchange Commission sued Goldman Sachs for securities fraud in a similar case a week later, journalists and commentators explained what the investment bank was charged with through the prism of ProPublica’s story on Magnetar. Sen. Christopher Dodd (D-Conn.) cited the story on the Senate floor during the debate on financial reform to explain why Congress needed to act. The Securities and Exchange Commission is investigating the Magnetar deals.

Our second major story, in August, scrutinized the banks themselves. It reported that, faced with difficulty in selling key pieces of their mortgage-backed securities during the housing bubble’s end days, many of the nation’s largest investment banks hit on a solution that preserved their profits and huge bonuses: They created fake demand.

Bankers created new CDOs to buy the hard-to-sell pieces of previous CDOs. The questionable trades allowed bankers to keep rolling an assembly line that otherwise should have ground to a halt—and constituted one of the greatest episodes of self-dealing in financial history.

To demonstrate the activities of the banks, ProPublica undertook a massive data analysis of the CDO industry, a study that no one had done previously. Our investigation showed that by 2007, when the CDO market was at record levels, such incestuous deals had become an industry-wide practice. Sixty-seven percent of a key part of CDOs were bought by other CDOs in 2007, up from 36 percent three years earlier.

The story again got the attention of regulators and policymakers. We learned that SEC investigators were interviewing bankers involved in CDO deals we wrote about and showing them our stories.

The final piece penetrated deep into investment bank Merrill Lynch to try to answer the mystery of why banks retained so much of these subprime securities themselves. Despite multiple previous written accounts about Merrill, including in several books, we were the first to uncover a financial arrangement within the bank that circumvented internal risk controls and allowed a group of the firm’s traders to stockpile tens of billions of dollars in un-hedged, largely unsellable and hugely risky securities. Those securities ultimately collapsed in price and forced the sale of Merrill to Bank of America.